Lender-paid mortgage insurance maximizes home ownership benefits

Loan officer: John Holmgren, Holmgren & Associates/ Finance of America Mortgage.

Property type: Singlefamily home in Oakland

Purchase price: $ 825,000

Loan type: 30year fixed rate.

Loan amount: $ 742,500.

Rate: 3% with no points.

Backstory: Tax rule changes that took effect in 2019 had a big effect on the tax advantages of home ownership for many California home buyers. The two key changes were as follows: Limit on mortgage interest deduction to $ 750,000 mortgage balance. Limit on property tax deduction, depending on other state/ local taxes.

For home purchasers buying homes from $ 800,000 and up, the effect of the property tax deduction change was to effectively eliminate that deduction because these buyers state income tax liability is usually at or above the deduction limit. All the more reason to maximize the mortgage interest deduction. Normally buyers who put down less than 20% are required to purchase private mortgage with a monthly premium that is seldom tax deductible and can be a major cost, depending on the buyer’s credit scores and other factors. With lenderpaid mortgage insurance, the mortgage insurance is embedded into the mortgage rate, thereby converting it from a nondeductible expense to one that is deductible.

In this case, the buyers had the choice of a rate of 2.875% with mortgage insurance or 3% with lenderpaid mortgage insurance. The difference in mortgage payment between these options was far less than the mortgage insurance premium and is deductible because the mortgage balance was less than $ 750,000.

There are times when it makes more sense to go with the separate mortgage insurance — such as when buyers are buying fixerupper properties that they will be making immediate improvements, thus increasing property value.

In these cases the mortgage insurance may be cancellable pretty quickly once the home buyer demonstrates to the lender that the property has appreciated, creating a 20% equity position.

I encourage home buyers putting less than 20% down to ask their lenders about lender paid mortgage insurance options. Income tax time isn’t fun, but it can be a little brighter with good planning.

John Holmgren, Holmgren & Associates/ Finance of America

Mortgage, 5103811961, john@ mortgageholmgren. com.